In my most recent weekly appearance on The Business Forum Show, Kevin Hunter and I chatted about buy-sell agreements and their importance to small businesses with more than one owner. You can listen to the discussion here.
A buy-sell agreement is, in essence, a business prenuptial agreement. It specifies certain “triggering events” which, if they occur, give the other owners and/or the company itself a right of first refusal over the ownership interest of the owner who is subject to the triggering event. Common triggering events are an attempted voluntary sale to a non-owner, an involuntary transfer (such as a transfer arising from a divorce, bankruptcy or judgment collection), disability and death.
The buy-sell agreement, if drafted properly, will clearly spell out (i) what the triggering events are, (ii) who has what rights of purchase (typically the remaining owners can purchase the interest subject to transfer on a pro rata basis in accordance with their existing percentage ownership, and if they do not exercise, the company can then elect to redeem the interest); (iii) how the other owners exercise their rights of first refusal (including notice from the owner whose interest is subject to transfer to the other owners, those owners’ own notice of election to purchase their portion, and the timing of the closing on the purchase(s)); and (iv) the method for establishing the purchase price and payment terms.
With regard to these terms, there are no rules set in stone; the owners are free to negotiate a set of terms that work for them. What is important is to make sure that all the bases are covered so there is no ambiguity when it comes time to act pursuant to the buy-sell agreement.
I work with a lot of clients who go into business with family members or close friends, and at the start of their business they cannot fathom being at odds with their business partner. Once they hear of some of the stories of past battles I’ve had to participate in – and the cost of fighting those battles – most of them opt to execute a buy-sell agreement.